The Fragile Facebook Economy: Developers Struggle As Rules Change

Among the more than 650,000 developers who make a living in the ecosystem around Facebook, resentment is brewing. A redesign to the service several months ago has made it tougher to recruit new app users and make money. But Facebook says third-party developers will play a big role in the future.

Dave Morin, 28, sits at the epicenter of the Facebook Economy, and at first glance, the backdrop looks pleasant. Outside Facebook's headquarters in Palo Alto, gentle sunshine bathes the wine bars, sushi restaurants and coffee shops along University Avenue on a criminally beautiful, 70-degree Monday in January.

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But Morin's job isn't so carefree. As a senior manager of the Facebook Platform, the technology on top of which people can build applications and games to run on the world's largest social network, Morin's decisions affect not only the marketers, advertisers and venture capitalists who have bet millions on Facebook's technology being the most important innovation in computing since the invention of Microsoft Windows, but also the fate of 650,000 third-party software developers who build Facebook applications.

"We were, and still are, completely humbled by the response to the technology," Facebook's Morin says. "We've had to learn how to scale and manage a community of this size."

A growing number of those developers say the complex Facebook ecosystem has hit real trouble, hurting large and small developers alike and dooming some shops that built businesses around the platform.

In the fall of 2008, a redesign that Facebook deemed critical for its 150 million users forced large companies with some of the most popular Facebook apps to immediately retool their strategies and tweak their product designs. Worse, the redesign eviscerated some small developer shops overnight as the Web traffic of their applications — and the subsequent money they made by selling advertisements on top of those apps — plummeted.

"It was pretty horrible for them, and most people would tell you the same thing if they were being honest with you," says Murtaza Hussain, president of Peanut Labs, a market research firm that has partnered with social networks (including Facebook) and application developers. "A lot of apps were lost overnight. Many developers hate Facebook for it because they left their day jobs, and they put a significant amount of their time and money developing stuff for Facebook."

Can the Facebook platform flourish despite the current developer dissatisfaction? Not everyone agrees. For its part, Facebook knows that the future of the Facebook Platform relies heavily on the input and innovations of the developer community, Morin says. That future centers around Facebook Connect, a project aimed at enabling users to take their Facebook identity along with them while visiting third-party sites. Connect plays into Facebook's desire to build a sort of Web-based operating system, to be the logical starting-point on the Internet for many users, just as Google would like to do.

Trouble Starts: Redesign Makes Developers Scramble

Ever since Facebook CEO Mark Zuckerberg ("Zuck" to Morin and other Facebook staffers) announced in May 2007 that the Facebook Platform would be open to developers all over the world, the evolution of the technology has been sporadic and unpredictable. A Wild West environment emerged in the first few months. Individual developers got rich overnight (at least on paper) as their applications spread across the social network in a matter of hours. Some entertained million dollar buyouts or took funding to grow into full-fledged start-up companies. Now, a year and a half later, critics say this community has been used by Facebook to buoy its own traffic growth and left with this rule of law: What the social network gives it can take away.

Not everyone wants to hear it, says Scott Rafer, a Silicon Valley veteran who has worked with blogging technologies and now runs Lookery, a company that does ad targeting for publishers on social networks including Facebook. Three months ago, speaking at a Facebook developer conference in Berlin, Rafer told members of the Facebook ecosystem that in his estimation, the Facebook platform was dead.

"A lot of people got screamingly angry," Rafer says. "I was talking to a crowd of folks that were looking into building more Facebook apps. I was like, 'Are you nuts?'"

Though he editorialized a bit, Rafer says he was simply sharing what he knew from cold hard numbers. The traffic on his clients' Facebook applications fell by nearly 50 percent after the redesign.

Blogs following the Facebook ecosystem and research firms support some of his conclusions, at least by the numbers. An analysis by Inside Facebook, an independent blog that follows the social network and its ecosystem, found that two of the top three applications on Facebook, built by Slide, declined in users in the first several weeks following the redesign going sitewide. One of Slide's apps, called FunSpace, fell sharply (by 37 percent) in monthly active users. The top app at the time, Super Wall (built by RockYou), held 18 million monthly users before the redesign. Today, according to AppData, it has 12 million. During the same first month after the redesign, Hussain's Peanut Labs estimated that 66 percent of the top 250 applications on Facebook decreased in daily users.

When the Facebook platform first launched, many successful applications appeared in small boxes (known in the social networking industry as "widgets") on a user's profile page, allowing that user's friends to engage with the apps upon visiting the page. Ideally, these friends would be compelled to install the applications themselves, increasing the app's pervasiveness across the network. When Facebook redesigned the site, the company sought to de-emphasize the profile pages and focus on the newsfeed — a column that runs down the center of a user's homepage and keeps the user updated on actions taken by their friends on the service, such as posting a picture, updating personal status or attending an event. Facebook moved the majority of third-party widgets into a new "boxes" tab.

"The redesign decreased the chance of serendipitous discovery of an interesting application," says Keith Rabois, VP of business strategy at Slide. "One of the best and most healthy ways to discover a new application is by seeing it on a friend's profile. Tabs are a very poor interface for discovering new things."

After Facebook Traffic Spikes, Relationship Changes

But the redesign represented what Rafer calls the "coup de grace" in a sequence of events during the last year that showed Facebook was clamping down on the number of ways that application developers could enable their products to incubate across the social network.

When the Facebook platform first launched, the company put few restrictions on how developers could market their products. After a Facebook user installed a new app, the application maker would often invite the user's friends to install it as well, flooding homepages with invitations in what became known by blogs and publications covering the space as "app spam." Facebook, one by one, began closing or constraining these channels.

Rafer says Facebook kept the platform so open for a period of time to gain traffic, and when they had garnered the eyeballs and surpassed MySpace as the largest social network, they closed the door a bit.

"They had this huge amount of traffic by then, and they were big enough to get Madison Avenue's attention," Rafer says. "So they clamped down on some of the apps, which, frankly, many of which were trash anyway. The developers thought the Facebook platform in its 1.0 version was their God-given right. They thought it was Facebook's moral duty to maintain it. Well, it's their [Facebook's] playground and they can do what they want."

Since the fall 2008 redesign, the smaller Facebook app developers have likely fallen hardest off the monkey bars, since these developers relied heavily on the profile pages for their applications. Without the clout extended to bigger shops like RockYou and Slide, they also feel much less inclined to complain about Facebook's move publicly, for fear their situation could worsen, especially if they have investors funding their long-term business plans.

Today, many of these smaller developers won't talk on the record. An organization called SF Beta arranges a monthly mixer cocktail party for members of the Bay Area start-up community. Earlier this month, at an event held at 111 Minna St., a bar in San Francisco's South of Market district, some young application developers were in attendance mingling over six dollar beers and colorful drinks. Many developers who had started small companies talked with passion about the effects of the Facebook redesign, now that they've had several months to monitor the effects. When asked how his apps fared after the redesign, one developer made the sound of a plane crashing.

Some small shops do say publicly that the new Facebook Platform landscape has evolved into a more challenging business environment. Game developers have fared better than others, because in addition to ads, their applications derive money from users paying them directly for extra features.

Akron, Ohio-based developer Matt Maroon has taken $20,000 in funding from yCombinator, a venture capital firm that gives small rounds to start-ups in their infancy. His company, Blue Frog Gaming, builds fantasy sports applications that run on top of social networks, including Facebook. He says the redesign hurt big and small developers alike, especially if they weren't mindful that the rules could change.

Facebook "really hurt the Slides and RockYous and those guys," he says. "As a developer you're always cognizant of the fact you're playing in someone else's backyard. They put display ads on [those apps] which pay almost nothing. The games are making money and no one else's seems to be."

Chrys Bader got out of the Facebook app-making business nearly a year ago, before the trouble really began, he says. He co-created an application that integrated Yahoo! Answers on top of Facebook, then sold his half of the business in February 2008. The app today still enjoys a small following, but it wouldn't be a big business, he says.

"At first, the platform opened up and there wasn't any limits," Bader says. "You could automatically invite anyone to the app. If someone was coming to me now and saying they want to create a Facebook app, I'd tell them all the problems and how hard it is."

All the developer shops also live with the knowledge that Facebook might someday push any third-party app aside by providing similar services to users itself. iLIke, a service that allows people to share music interests and playlists, is one of the of the most popular applications on Facebook. Rumors have gone around Silicon Valley that Facebook would make its own version of just such a service. Rafer says it would be better for Facebook's image to purchase iLike.

iLike declined comment for this article. But some other leading Facebook developer firms say they're confident that Facebook doesn't want to allocate the amount of necessary resources to compete in that way.

"If you build an application really vibrantly, and you're incredibly dedicated to it, it's actually very difficult for Facebook to copy and improve the user experience," says Rabois of Slide. "As an example, we have a whole team that does nothing but innovate on top of the Top Friends application."

Facebook Connect: The Operating System of the Future?

Facebook CEO Zuckerberg regularly handles the interviews where he's asked the same set of questions that boil down to one: How will Facebook make money? Zuckerberg has not answered the question to the satisfaction of many industry-watchers and Wall Street analysts. It could ultimately be Morin and his group that answer that tricky question. They remain out of the spotlight, steadfastly focused on a pretty heady mission: make Facebook the modern version of the operating system, an OS that makes the Web fundamentally social across all sites and applications.

If the next wave of Internet wars takes place between Facebook and Google, Connect might be Facebook's strongest weapon, leading the company to focus mightily on building out ways to support sites that work with Connect, Rafer says. Both Facebook and Google have ripped pages from Bill Gates' Microsoft approach of being the first-stop on a user's computing experience. Google says the modern day operating system, or at least the starting off point on the Web, starts with search. Facebook believes it starts with people connected via social networking.

Despite the criticisms of Facebook's fall 2008 redesign and their governance of it, Morin and his group emphasize the importance of the developer community in this effort. Unlike some past technology gurus, they also admit their own mistakes.

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